Our Operating Environment

Sanlam’s performance is shaped by external and internal factors that span many geographies. These factors include economic and regulatory changes, combined with social dynamics. Sanlam’s four strategic pillars focus the Group on achieving specific transformation outcomes while being responsive to our environment. This is possible with the support of a robust governance system that ensures that we act ethically and responsibly.

Although global economic expansion retained momentum, risks to the outlook continued to build. These include the shift towards less accommodative monetary policy in developed economies, increased US trade protectionism, the trade-off between addressing financial sector risk and maintaining firm GDP growth in China, and the peaking impact of US fiscal expansion. Even in the US, where real GDP growth exceeded potential, signs of a slowdown emerged in interest-sensitive sectors.

A notable feature of developed economies was the lack of significant core inflation pressure, despite firmer wage increases amid historically low unemployment rates. Accordingly, the shift towards monetary policy “normalisation” in developed markets remained pedestrian, but persistent, as the US Federal Open Market Committee (FOMC) increased the federal funds rate three times by 25bps.

The path of interest rate hikes in the US since late 2015 has been gradual, but relentless, amounting to a cumulative increase of 2,25%. This reflects concern over possible inflation pressure due to a tight labour market, and the risks posed by apparent financial imbalances. The US FOMC softened its stance late in 2018 against the backdrop of benign inflation, indicating that future interest rate decisions would be data dependent. However, it maps a gradual interest rate hiking path through 2019 and into 2020.

Elsewhere, the European Central Bank (ECB) left its key policy interest rates unchanged but indicated that the net purchases under its asset purchase programme (APP) ended in December 2018. Even so, the Bank indicated that principal payments from maturing securities purchased under the APP will be reinvested beyond the date at which the ECB (eventually) increases interest rates.

Uncertainty surrounding the United Kingdom (UK) exit from the European Union (EU) and its likely form continued. The Bank of England, after increasing its Bank rate in mid-2018, adopted a “wait and see” approach, leaving its policy interest rate unchanged for the remainder of the year.

Looking ahead, in a relatively benign scenario an amended UK-EU Withdrawal Agreement is negotiated, which wins the support required in the UK parliament.

If so, the UK either enters into a transition phase as from 29 March 2019, or remains in the EU as the Article 50 negotiation period is extended. Failure by the UK parliament to conclude a deal with the EU would throw up the possibility of a second referendum, an early general election or, alternatively, a disorderly exit. The latter implies material downside risk to the UK economy, given a likely fall in business confidence and investment, as well as probable capital outflows.

Against the background of increasing risk-free interest rates in the US, renewed US dollar strength and concerns about the possible impact of escalating trade protectionism on future GDP and profits growth in emerging market (EM) economies, a dominant theme in 2018 was the re-pricing of risk assets. This was reflected in EM currency weakness and marked decreases in EM bond and equity prices.

The currencies of vulnerable EM economies, which depreciated sharply from mid-year, stabilised in the final quarter of 2018, partly in response to interest rate hikes in, for example, Turkey, Argentina and South Africa.

Also, the US and China agreed in December 2018 to negotiate on a number of trade-related issues, including tariff increases, which effectively amounted to a temporary ceasefire in the trade war. The risk of renewed trade hostility remained.

The South African economy disappointed with real GDP growth estimated at less than 1%. Household income and consumption growth was soft, due to a marked slowdown in compensation growth, a structurally high unemployment rate and an increasing tax burden.

In contrast, the total gross operating surplus of corporations improved to an annual increase of 7,9% in 3Q18, from a trough of 4,7% in 1Q18. At the same time, earnings of listed companies on the JSE/FTSE All Share Index advanced 14,5% in the year to end-December 2018, supported by an increase of 29,1% for companies listed on the Industrial Index. However, the FTSE/All Share Index yielded a total return of negative 8,5% in domestic currency in the year to end-December 2018. Average equity market levels in 2018 were broadly in line with 2017, placing severe pressure on growth in the Group’s assets under management and hence fund-based fee income.

Persistent weakness of the economy has its roots in structural economic deficiencies and the crowding-out effect of the government’s deteriorating fiscal position. Despite years of fiscal consolidation, the state continues to absorb a large share of the available resources in the economy, reflected in a high level of government consumption spending, an increasing tax burden and high real interest rates.

The Medium Term Budget Policy Statement, released in October 2018, suggests National Treasury’s intent to stabilise the debt ratio. However, the timeframe for fiscal consolidation was extended once again as National Treasury projected wider budget deficits over the medium term, while the level of the government’s gross loan debt continues to increase relative to GDP. Encouragingly, though, the promise of economic reform under the leadership of President Ramaphosa helped South Africa avoid further sovereign debt-rating downgrades in 2018.

Still, given constrained real economic activity, unfavourable balance of payments ratios and a lack of progress in reducing the fiscal imbalance, the South African rand was not spared the EM sell-off in 2018. The currency recorded a double-digit decline of 16% relative to the US dollar in the year to December 2018. The weakening of the rand against major currencies where Sanlam operates is depicted in the following graph:

The weaker rand had a positive impact on the RoGEV of the non-South African operations. The rand, however, strengthened initially before weakening later in the year. Movements in the average rand exchange rate were more subdued with an insignificant overall impact on Sanlam’s translated earnings.

Nonetheless, the decline in the real trade-weighted rand should improve net exports, while the collapse in oil prices in late 2018 is expected to increase South Africa’s terms of trade and support domestic purchasing power. President Ramaphosa’s “investment drive” also holds some promise, given its emphasis on cooperation between government and the private sector. However, structural economic constraints will take time to address and although an economic recovery appears to be under way, it is fragile. Accordingly, real GDP growth of less than 2% is expected in 2019.

Despite sustained rand weakness, the spike in oil prices during the first three quarters of 2018 and the 1% hike in the VAT rate in April 2018, core inflation surprised on the low side relative to expectations. This suggests companies lacked pricing power against the background of weak domestic final demand.

Subdued inflation prompted the South African Reserve Bank to cut its repurchase rate by 25bps in March 2018. However, given an increase in the annual advance in headline inflation from a trough of 3,8% in March 2018 to 5,2% in November 2018, against the backdrop of US interest rate hikes and depreciation of the rand, the Reserve Bank’s Monetary Policy Committee increased its repurchase rate by 25bps in November 2018. In an important development the Bank stressed its intention to guide inflation expectations and outcomes towards 4,5% – the middle of the inflation-target range – in the long run.

The lack of progress in fiscal consolidation maintained upward pressure on real interest rates. Domestic bond yields remained elevated, despite relatively well-behaved inflation. Concomitantly, the All Bond Index yielded a total return of 7,7% in local currency in the year to December 2018.

The increase in long-term interest rates impacted negatively on RoGEV and growth in VNB in 2018.

Real GDP growth in sub-Saharan Africa (SSA) was constrained by the under-performance of the region’s largest economies: South Africa, Nigeria and Angola. Indeed, the estimated SSA regional growth rate of 2,8% for the year masks a wide divergence in growth outcomes between individual countries. Given an expected improvement in growth in the large economies, though, average growth for the region is forecast to lift to 3,25% in 2019.

The further tightening of global financial conditions or any unexpected slowdown in China would, however, imply downside risk in the region. Numerous countries on the African continent will need to limit the potential negative impact on exports should the UK leave the EU without agreeing to new trade deals. Those trade agreements with the UK which were previously negotiated through the EU will have to be renegotiated.

At least, after running expansive fiscal policies for a number of years following the Global Financial Crisis (GFC), general government budget balances in SSA, in aggregate, stopped expanding. Countries in the region are increasingly focused on fiscal consolidation, but deficits, nonetheless, remained large in, for example, South Africa, Zambia, Ghana, Namibia, Kenya and Uganda. At the same time, the gross government debt level for the region, in aggregate, continued to increase relative to GDP.

A number of the African economies that continue to deliver high economic growth rates are to be found in East Africa. Although lending was constrained in Kenya by the retention of interest rate caps, real GDP growth remained strong, partly supported by buoyant tourism-related receipts. Growth of around 6% is forecast for 2019, similar to the estimate for 2018. Kenya has continued to run large budget and current account deficits and the country’s International Monetary Fund (IMF) stand-by credit facility, extended by six months in March 2018, was not renewed. Although a large share of Kenya’s total public debt is external debt, concessional loans remain a significant source of funding for infrastructure projects.

Real GDP growth also remained strong in Rwanda, Tanzania and Uganda. The latter runs large twin deficits and government debt is expected to continue rising. However, a significant portion of the Ugandan government’s spending reflects capital expenditure. The country is supported by multilateral organisations and it attracts a significant amount of concessional financing.

As experienced elsewhere in EM, global economic developments, including the shift towards greater US trade protectionism and US dollar strength, proved unfavourable for Africa’s financial markets, including countries where economic growth is strong. In East Africa, total equity market returns in US dollar were negative in Kenya (-13,3%) and Tanzania (-14,1%), despite their relatively stable currencies.

Angola made progress in fiscal consolidation. However, the economy contracted in 2018 and lower oil prices are likely to renew pressure on the government’s revenue receipts. Additional risk emanates from non-performing loans, which have accumulated in state-owned banks. After depreciating sharply, the Angolan kwanza remains vulnerable to fluctuating oil prices. However, access to IMF funding is supportive. Also, the nascent shift by the Banco Nacional de Angola towards a more flexible currency regime should assist the economy in adjusting to macroeconomic imbalances.

Among other oil producers on the continent, Nigeria remained lacking in structural economic reform. The country experienced persistent high inflation and soft real GDP growth. The latter was constrained by disappointing oil production. Against the backdrop of a lacklustre domestic environment, the Nigerian equity market recorded a negative total return in US dollar of 15,1% in 2018.

Following a marked improvement in response to foreign capital inflows early in 2018, Nigeria’s foreign exchange reserves declined late in the year as the country’s external accounts weakened. Nonetheless, the sovereign issued $2,86 billion in Eurobonds in November 2018, which helped to keep the Nigerian Autonomous Foreign Exchange Rate relatively stable.

On the fiscal front, Nigeria’s total government debt is low, but reflects a moderate upward trajectory. Debt servicing cost is high. Encouragingly, the government’s budget for 2019 reflects an intended fiscal consolidation. However, economic activity is undiversified and total GDP and fiscal outcomes are materially influenced by fluctuating oil prices and production levels.

In the Common Monetary Area, Namibia’s GDP growth continued to disappoint and fiscal consolidation remained inadequate, partly reflecting an excessive government wage bill. Loss-making state-owned companies imply the balance sheet of the state is deteriorating. The level of public sector debt is moderate, but has increased rapidly in recent years. The pressure emanating from these developments was alleviated by access to African Development Bank financing and an improvement in the country’s current account balance. Ultimately, though, Namibia is unlikely to endure ongoing fiscal consolidation if GDP growth does not lift, implying risk to the Namibian dollar peg to the South African rand over time. The country’s equity market recorded a negative total return of 9,9% in US dollar given the weak economic environment and depreciation of the Namibian dollar.

In West Africa, amid low inflation outcomes, growth remained strong in Côte d’Ivoire. This was supported by a high level of public sector infrastructure investment. The government is focused on improving business conditions and pursuing fiscal consolidation, although progress may be constrained by revenue-underperformance. Real GDP growth of 7% is estimated for 2018, which is also the forecast for 2019.

A number of the African economies that continue to deliver high economic growth rates are to be found in Africa.

Among the non-oil commodity producers, Botswana experienced firm economic growth despite softer mining activity, notably diamonds. Benign inflation precluded the need for monetary policy tightening, while the government’s Economic Stimulus Programme is expected to support economic activity. The country also runs a current account surplus and has a high level of foreign exchange reserves relative to imports. The large weight of the South African rand in the basket of currencies to which the pula is fixed, makes the country vulnerable to tighter global financial conditions. Looking ahead, solid real GDP growth of 4% is forecast for 2019, which follows estimated growth of more than 4% in 2018. Despite the economy’s sound performance, Botswana’s equity market recorded a negative total return of 14,1% in US dollar in 2018.

Elsewhere, Zimbabwe’s economy remained stressed following the end of former President Robert Mugabe’s rule, given severe foreign exchange shortages, liquidity constraints and inadequate economic infrastructure. Supply constraints led to a spike in inflation (an annual inflation rate of more than 40% was recorded in December 2018). A comprehensive economic reform strategy is needed, including a meaningful fiscal adjustment. In late 2018, the IMF discussed the potential for a staff-monitored programme with Zimbabwe, but this precludes an IMF financial programme, which would require the clearance of arrears with international lenders.

In Zambia an excessively loose fiscal policy prevented access to an IMF support package. Even though growth has remained relatively firm, it is insufficient to prevent a continued build-up in the country’s already high debt level. Macroeconomic risk is elevated. Accordingly,
Fitch Ratings and S&P each downgraded Zambia’s long-term foreign currency debt rating by one notch to “B-” in late 2018. Assistance from the IMF is imperative, but not assured.

In North Africa, Morocco continues to address its fiscal and external imbalances, but structural economic impediments persist. A high level of imports, to a significant extent reflecting higher oil prices, placed pressure on the current account balance, while credit extension was constrained. Looking ahead, the fall in oil prices late last year, if sustained, should improve Morocco’s terms of trade and its trade balance, while supporting domestic purchasing power against a low-inflation backdrop. Firm non-agricultural GDP growth is expected in 2019, but continued economic reform is needed.

Even though its foreign exchange reserves declined in 2018, Morocco appears unlikely to make use of its IMF Precautionary and Liquidity Line, although foreign debt issues seem probable. In any event, the exchange rate peg (against a basket consisting of the euro and US dollar) was maintained through last year. Early in 2018 the fluctuation band for the dirham was widened, while the country is expected to shift towards a more flexible exchange rate regime in the medium term. Amid modest depreciation of the dirham against the US dollar, the equity index fell 9,9% in US dollar in 2018.

In India, growth remained strong in 2018, estimated at more than 7%. Risks concentrated in the bank sector came to the fore with state banks particularly exposed to non-performing loans. The country, nonetheless, implemented a new solvency and bankruptcy code, while the central bank and government recapitalised public sector banks. Ultimately, softer credit extension is likely to dampen GDP growth in 2019, but lower oil prices should support domestic purchasing power. This, in tandem with firm fixed-investment spending is expected to maintain growth at a high level in 2019. However, given lower-than-expected revenue receipts, there is risk of fiscal slippage, which is likely to be accentuated if growth disappoints.

Meanwhile, India’s equity market yielded a negative total return of 4,1% in US dollar in 2018. This, however, follows a sharp increase of 38,7% in 2017, while India’s rupee depreciated by close to 10% over the year.

In Malaysia, the equity market recorded a negative total return of 4,7% in US dollar in 2018 as supply disruptions to key exports of liquefied natural gas and palm oil weighed on exports and real GDP growth. Further, government infrastructure projects were curtailed. Temporary tax breaks, however, boosted consumer spending and private sector investment proved durable. Looking ahead, the impact of supply disruptions on exports should also fade in 2019. On balance, growth is expected to remain firm in 2019.

Regulation as an Enabler of Resilience

Sanlam’s ability to contribute to resilience and create value for stakeholders is linked to evolving regulation, as it creates the environment within which we operate and compete. Regulations aimed at the fair treatment of clients, fair competition between product providers and the prevention of large-scale corporate failures and financial instability contribute significantly to the trust clients have in the industry and therefore its long-term sustainability.

We support the regulatory developments currently being considered as these are largely in line with these resilience and sustainability objectives.

Markets that are well regulated attract local and international investors, resulting in increasing levels of available capital. These markets also contribute to economic efficiency, leading to better allocation of capital and thereby increasing the prospects for long-term economic growth. Well-functioning markets build trust and earn legitimacy.

The global regulatory reform agenda of the past decade continues evolving to prevent systemic market risk. In South Africa, the regulatory agenda has been dominated by the Twin Peaks model, social security, the role of the state in the provision of financial services and financial inclusion. Intensifying risk related to financial crime, data privacy and cybersecurity further shapes the regulatory landscape.

Sanlam is committed to regulatory reform that contributes to resilience and prosperity of stakeholders. We recognise that we operate in a highly regulated industry and share regulators’ vision for efficient and effective financial services industries globally. We support regulators in developing tools and mechanisms that will ensure a more predictive response to the next potential crisis. We welcome the way in which this is evolving from being focused on client-centricity and capital and liquidity management, to also include increased sensitivity for the role of ethics, culture and related accountabilities.

A consequence of the increased regulatory burden is significantly higher barriers of entry. While this benefits large and established groups such as Sanlam, we believe that it is to the advantage of the industry to have strong competition. The current scale of regulatory reform also demands skilful, considered and responsible responses. This can affect management capacity, adding to real and opportunity cost in business.

The financial services industry is built on a business model that requires long-term valuations and assumptions. The uncertainty created by numerous and uncoordinated regulatory proposals therefore impacts strategic decisions, investment choices, innovation and product design.

We have a further concern that the number of concurrent initiatives create complexity and interdependencies that might result in unintended consequences not yet fully anticipated or mitigated.

South African regulatory developments with an impact on the financial sector, but not material for Sanlam:

Financial Sector Regulation Act, 9 of 2017 (FSRA) covering the levies on financial institutions, the process of registration of conversions and the status of instruments issued including directives and notices

Financial Sector Levies which provide for the funding of the Prudential Authority (PA), the Financial Sector Conduct Authority (FSCA), the Financial Services Tribunal, the Ombud Council, the Office of the Pension Funds Adjudicator and the Office of the Ombud for Financial Services Providers

Draft Amendments to the Regulations: Long-term Insurance Act, 1998

Draft changes to the revised Policyholder Protection Rules

A FSCA status update on the Retail Distribution review (RDR), confirming that reforms will promote the fair treatment of financial customers and will be implemented in a phased manner

FSCA’s draft conduct standard on the criteria for living annuities in a default annuity strategy

Regulatory developments with a significant impact on Sanlam:

The Insurance Act, 18 of 2017, took effect on 1 July 2018 with the significant implementation effort largely completed. The conversion of the Group’s insurance licences as required by the legislation are in progress and will be finalised in 2019.

Draft Taxation Laws Amendment Bill, 2018: the most significant change is the tax treatment of amounts received by or accrued to portfolios of collective investment schemes.

Twin Peaks Model

The Twin Peaks model of financial regulation aims to strengthen our financial markets through improved conduct regulation and to build a more resilient and stable financial system in South Africa.

The Financial Sector Regulation (FSR) Act was effective from 1 April 2018, thereby establishing the Twin Peak regulatory and supervisory model. Two new regulators have been established with a comprehensive set of powers that enhances accountability.

The new Financial Sector Conduct Authority (FSCA) replaces the FSB and is responsible for the supervision of the conduct of business of all financial institutions, and the integrity of the financial markets.

The new Prudential Authority (PA) is established in the South African Reserve Bank. It maintains and enhances the safety and soundness of financial institutions that provide financial products. It is mainly concerned with capital and liquidity requirements as defined by a risk-based regulatory regime for long and short-term insurers in South Africa, and implemented through the Solvency Assessment and Management (SAM) project. It awards licences based on conditions that include promoting developmental, financial inclusion and transformation objectives.

Outcome: Clarity on who regulates what

2018 was characterised by high levels of engagement between Sanlam and the new regulators, particularly the PA, as these familiarised themselves with the players in the financial services sector.

New primary legislation will focus on revising, consolidating and harmonizing the legal framework for prudential and market conduct in the financial sector.

The new Conduct of Financial Institutions (CoFI) Bill will replace existing sectoral legislation to ensure a comprehensive, consistent and complete approach to governing the conduct of financial institutions across the financial sector.

The new Insurance Act took effect on 1 July 2018 and provides a consolidated legal framework for the prudential supervision of the insurance sector. The new prudential authority (PA) will convert the registration of all insurers to new licences within a period of two years.

New subordinate legislation include standards to be published under the new acts to give effect to the detail requirements.

Conduct Standards under the CoFI Bill

The conduct of business reforms include the Retail Distribution Review (RDR), Treating Customers Fairly (TCF) and Retirement Reform matters. These will be addressed in the conduct standards, but is currently reflected in changes to existing legislation.

Prudential standards under the Insurance Act

The Prudential Standards covering Financial Soundness Standards (FS) and Governance and Operational Standards (GO) were published on 1 July 2018.

Outcome: clarity on what they regulate

New Regulatory Strategies

The PA released its Regulatory Strategy for the period 2018–2021. It provides an overview of the PA’s approach to regulation and supervision, the principles that will guide its regulatory and supervisory decisions, the PA’s key priorities over the next three years, and the key outcomes that the PA intends to achieve to realise its objectives.

The PA’s mandate is to:

promote and enhance the safety and soundness of financial institutions that provide financial products and securities services;

promote and enhance the safety and soundness of market infrastructures (MIs);

protect financial customers against the risk of these financial institutions failing to meet their obligations; and

assist in maintaining financial stability.

Following the establishment of the FSCA, a Regulatory Strategy of the Financial Sector Conduct Authority (October 2018 to September 2021) was published, detailing the following:

regulatory and supervisory priorities for the next three years, including building a new organisation and an inclusive and transformed financial sector, creating a robust regulatory framework that promotes fair customer treatment, enabling informed financial customers, strengthening the efficiency and integrity of our financial markets and understanding new ways of doing business and disruptive technologies

the intended key outcomes of the strategy, including, for example, being trusted by financial customers to promote their fair treatment by financial institutions and take visible, meaningful action against those that jeopardise their financial well-being or the integrity or efficiency of the financial markets, being respected by all stakeholders, having increasingly aligned and harmonised conduct standards under existing sectoral laws, working according to a holistic TCF-aligned supervisory approach, integration of financial education with regulatory functions and having access to improved data on consumer behaviour

guiding principles and matters to consider when performing functions

approach to administrative actions

how effect will be given to requirements of openness to consultation, accountability, consistency with relevant international standards, and general performance of functions under the Financial Sector Regulation (FSR) Act

The FSCA mandate is to:

enhance the efficiency and integrity of financial markets;

promote fair customer treatment by financial institutions;

provide financial education and promote financial literacy; and

assist in maintaining financial stability.

The FSR Act extends the jurisdiction of the FSCA to include oversight of financial products and services not overseen by the FSB. These include banking, services related to credit and the buying and selling of foreign exchange. It also dictates a shift in approach from the traditional compliance-driven model to being proactive, pre-emptive, risk based and outcomes focused. Crucially, the FSR Act includes financial inclusion and transformation of the financial sector in its objects.

Other South African Regulatory Developments Relevant to the Industry

It has been five years since the Act was signed into law and it has still not commenced. Revised draft regulations have been endorsed by the State Legal Advisory and have been submitted to parliament for approval. The regulator is in place and is empowered to investigate complaints and the measures organisations have put in place to protect and secure personal information. Appropriate and effective security safeguards as per condition 7 of POPIA remain the current key focus.

The bill proposes the establishment of the National Health Insurance (NHI) Fund and its associated governance and advisory structures. It indicates that for the next several years the Fund will focus on funding critically needed services for defined vulnerable groups. Sanlam Health Management submitted a response incorporating perspectives related to gap, primary health, distribution and health administration. Afrocentric also submitted a response. In our view, funding for NHI will remain constrained in the short term due to weak macro-economic conditions and other fiscal pressures.

Sanlam welcomed the intent to accelerate the development of a new capital regulation scheme that will be more closely related to the actual risk profiles of schemes. However, there are some concerns about proposed changes in governance structures, authority levels and technical matters, such as changes to the underwriting rules of medical schemes and how scheme contributions should be calculated and disclosed.

Sanlam and Medscheme commented on the report. This followed continuous engagement and discussion on market structure, tariffs processes as well as supplier induced demand since the initiation of the inquiry in 2014. The feedback supported HMI’s position that the recommendations have clear interdependencies and that these recommendations must be implemented in a holistic manner. Points of difference related to market failure, procuring value, the value of managed care, claims experience, loyalty and wellness programmes as well as accountable, clean and transparent leadership.

Supervision of Financial Conglomerates

Sanlam is regarded as a financial conglomerate: an institution in South Africa that operates across multiple industries, offering a myriad financial products and services across the continent and offshore. The Prudential Authority (PA) recognises that entities such as Sanlam are susceptible to contagion risk and are subject to higher levels of scrutiny through a new regulatory framework to be released. The PA intends to apply a multi-tiered supervisory framework which includes the supervision of individual stand-alone institutions, specialist group institutions and conglomerate groups which will focus on depositor, policyholder and member protection. Risks will be managed carefully due to the broad scope of the environment in which the financial conglomerates operate. A number of Sanlam volunteers represent ASISA on the financial conglomerate supervision project structures.

SEM Regulatory Developments

Increased capital requirements for insurance companies in the CIMA region.

The Ugandan Insurance Regulator is reviewing asset admissibility criteria for solvency purposes and issued draft regulations relating to prudential oversight, governance, control functions, business continuity, payment of premiums, classes of business, reinsurance and conduct of business.

Changes in the South African environment based on the Twin Peaks model may have implications for SEM over time.

Compliance Breaches

Sanlam experienced only one notable compliance breach. Safrican Insurance was found non-compliant with the Long-term Insurance Act due to an unauthorised sinking fund policy on its life insurance licence. To prevent any reoccurrence, steps have been implemented to include sign-off by various functions in developing specifications for new products. This will confirm that all licensing requirements are met. A R5 million penalty was paid to the Prudential Authority.

Preparing For IFRS 17

The International Accounting Standards Board (IASB) published IFRS 17 in May 2018. It is designed to achieve consistent, principle-based accounting for insurance contracts. The new standard requires insurance liabilities to be measured at a current fulfilment value and provides a more uniform measurement and presentation approach for all insurance contracts.

Sanlam launched an IFRS 17 project in preparation for implementation by 1 January 2022. The gap analysis phase is complete, as well as the development of IFRS 17 compliant disclosures and an overall blueprint for Sanlam that will guide implementation efforts across the Group. Sanlam and Santam is coordinating closely on the implementation of IFRS 17 and participating via ASISA to influence industry interpretation of the standard.

The most significant internal risks relating to IFRS 17 implementation is the availability and capacity of Sanlam resources given concurrent transformational projects.